Wall Street Watches Kosovo
So far, Wall Street has mostly ignored the air war on Serbia. But that could change if the fighting heats up or if it drags on.
"The longer it lasts, the more it becomes a real issue," said Hugh Johnson, chief investment officer at First Albany.
So far, the convention wisdom about the war has been that the conflict won't really affect the U.S. economy or companies. Serbia and Kosovo are far away and American corporations have few direct interests in the area.
"It's hard to see why this should affect an investment in Microsoft," said Les Alperstein, executive managing director of HSBC Washington Analysis. "How many PCs were those guys going to buy, anyway?"
"You shouldn't take your eyes off Kosovo," Johnson said. "But you shouldn't change your portfolio, yet."
The biggest unknown right now is what the impact would be of a protracted, bloody and inconclusive war on the European economic union. If the political will can't be found to dispatch a bully like Slobodan Milosevic in Western Europe's backyard, can Europeans find the courage to tie their economies closer together?
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A failure by the North Atlantic Treaty Organization to end the destruction of Kosovo could split Europe, said David Roberts, international economist for NationsBanc Montgomery Securities. Roberts said the European monetary union was created for political not economic reasons, which means political disagreements and failures will have a magnified impact.
Still, Roberts is surprised at how united Europe remains against Serbia, especially considering that NATO now includes three former Warsaw Pact members.
"Serbia is almost friendless," Roberts said. "When your best friend is Iraq, you're in trouble."
It used to be a mantra on the Street that wars and political crisis were bad for the stock markets, but equity investors seem to have developed immunity to political uncertainty. How can uncertainty in Yugoslavia bother you if you've got Amazon in your portfolio? Uncertainty abroad, of course, is great for the U.S. bond market and for the dollarA crisis there means lower interest rates here.
The only political events in the past 10 years that have really caused the stock market to tank are the start of the Gulf War and the Russian default. Both had real economic consequences, so investors were reacting to a changed investing landscape, not solely to added political uncertainty.
And it's questionable whether wars are really bad for the stock market, anyway. The Dow Jones Industrial Average has risen during every major American war of the 20th Century except one - the Vietnam War.
"I hate to say this, but wars are good for the economy," Johnson said. "But it's a heck of a way to help the economy." Wars are stimulative because the government spends money on bombs and bullets and barracks.
Alperstein doesn't expect a big fiscal stimulus from the Kosovo war. "The surplus will be $105 billion instead of $110 billion, so it just means they can't spend the money on something else that they would have spent it on," he said.
The Pentagon will probably order a few new cruise missiles to replace the ones sent to Milosevic and there'll be a few other incidental expenses, But the total defense budget is pretty well fixed for the next few years. It's not likely that even a long Kosovo campaign would increase the defense budget in any significant way.
The war also creates other risks. Russia remains a wild card. It's vehemently opposed the bombing and has announced plans to send a few ships into the area in a limp show of force. But Russia's long-term (and short-term) interests are with the West, Roberts said. Not only does Russia need a quick fix from the International Monetary Fund but it needs access to Western markets and capital.
Another risk comes from a possible escalation of the war. The White House and the Pentagon have insisted that the bombing will take a long time - perhaps a very long time - to achieve results. U.S. officials are battling against impatience. But as the horrors magnify, the pressure to do more will intensify.
American forces on the ground in Kosovo can't be ruled out.
Americans have been spoiled by the success of their war machine. Bosnia, Iraq and Grenada were too easy. Americans have almost forgotten what it's like to have casualties. If the planes start bringing back dead and wounded American boys, public support for our humanitarian gesture could crumble.
Political unrest at home would be more troubling to the economy and the stock market than a war in land on the other side of the world. Market psychology is fragile.
Written By Rex Nutting, CBS MarketWatch